The market rallied behind Shandong Hongyu Precision Machinery Co., Ltd.'s (SZSE:002890) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Shandong Hongyu Precision Machinery's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥4.6m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Shandong Hongyu Precision Machinery had a rather significant contribution from unusual items relative to its profit to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shandong Hongyu Precision Machinery.

Our Take On Shandong Hongyu Precision Machinery's Profit Performance

As previously mentioned, Shandong Hongyu Precision Machinery's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Shandong Hongyu Precision Machinery's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Shandong Hongyu Precision Machinery, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Shandong Hongyu Precision Machinery you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Shandong Hongyu Precision Machinery's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.